Decisions Process in Trend Following & Commodity Trading

To the inexperienced, the decisions process in trend following & commodity trading should be complicated. Since I have been involved in commodity trading since 1994, I have seen what stands the chance of succeeding over the long term and what does not. Besides being a Commodity trading advisor with a commodity pool I work as an AP ( associated person at a brokerage firm). I became an AP not to solicit business but to get a first hand over view who has succeeded ,who has not and what they were doing right.

We have had clients that were PHDs that could not earn a penny. If trading was equivalent to intelligence there should be alot more successful commodity traders. So what is one of the keys to success? As I harp on is discipline and patience, but there is more than that.

What I saw first hand succeed over long periods of time ( albeit with alot of aggravation ( if you let it)..& draw downs ) is trend following. As a trend follower in our commodity pool and commodity futures trading, we simply use price information and volatility to determine position sizing and entries & exits. I apologize but the truth is I have no idea regarding the future…my opinions mean nothing as everyone’s on CNBC or Bloomberg. ( as an example of an SP 500 trade we entered last week in which we exited..we entered due to a price break down…and covered yesterday with a loss of approx 1/2 of 1 % of our account). No one knows any more than me or you. So basing on the fact I do not use the future I have to use a simple mechanical trading system based on multiple time frames and markets to make low risk “BETS”.

More so …discussing knowing the future. Not just would I have to know what would be in any one market… I would need to know the future in numerous markets.. The reason being there are periods various markets are quiet and choppy. Not pushing the fact, the bottom line is I can not be an expert in 80+ markets. However realizing I do not know the future …not being an expert in any one market..I would say I am competent in my mechanical “simple” commodity trading plan based on entries..exits…and most importantly risk and money management. Hopefully over time I can grind out a positive return based on many years.

The fact of the matter is the less a commodity futures trader looks for the magic system, holy grail, indicator etc..or any complicated analysis the better off they are. ( what I mean there are less decisions to make). This is an example.. I would only enter when this indicator says this..but I need confirmation contingent on several other indicators ( same with an exit). The fact is PRICE is everything..When it moves…it moves.. It is pretty simple.. In commodity trading verbage I am referring to a Breakout or Breakdown. That is it. More so..the entries and the exits mean nothing.. the key is the money management..risk management..and position sizing. You can flip a coin and probably do as good as 50/50 with any entry..

Keep it simple but not simpler. Understand your system or plan. Understand how your commodity trading advisor thinks and puts on trades. This will keep you in the marathon of commodity trading. It is surely not easy.

Andrew Abraham has been in the financial arena since 1990. He is a commodity trading ddvisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

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